Social development, government legitimacy and the monetary system

I’ve been away for a few days traveling. During this time, I’ve also had the opportunity to drive through France from Bordeaux, to Paris and then on to Beaune. Everyone I came across laborer or entrepreneur they may have been, had a beef against the government; in some cases they had a serious beef.

I’ve come across two good posts in recent days. The first is an opinion piece in the New York Times which seems to be one more main stream publication that appears to be growing a pair. The second is a blog post that resonates deeply with me. Also, I’ve finally been able to get me a copy of Ellen Brown’s “Web of Debt” that I am reading presently.

Referring to “fines” imposed by regulators on blatant criminal behavior by the largest banks, the author comments:

“[…] The Barclays deal was just one in a long line of wrist slaps that big banks have recently received from the United States. Last May, when ABN Amro Bank (now largely part of the Royal Bank of Scotland) was caught funneling money for the benefit of Iran, Libya and Sudan, it was fined $500 million, and no one went to jail. Last December, Credit Suisse Group agreed to pay a $536 million fine for doing the same. In recent years, Union Bank of California, American Express Bank International, BankAtlantic and Wachovia have all been caught moving huge sums of drug money, but no one went to jail. The banks just admitted to criminal conduct and paid the government a cut of their profits. […]”

This is all factual information of course. It is not opinion, speculation or conjecture but fact.

But despite the enormity not only of the sums involved but of the legal and moral implications of what is by now well documented criminal negligence by the governing elites, not many seem to be able to make the part of things.

Sure, people are angry. People are angry in the USA as they are mad in the UK, France, Spain, Greece, Latvia, Hungary and a host of other countries. But most are mad at what in fact are only the proximate causes of their misery. The usual refrain is that bankers are heartless thieves or that politicians are knavish duplicitous bastards or that government (or individual leaders). All probably true and provable statements given a precise definition of the charge but, of course, nothing that hits home in the realm of the ultimate cause-to-effect dynamic.

“Relationships of trust are the glue that holds societies together. Trust takes a long time to establish, and much less time to destroy, hence societies where trust is wide-spread, particularly for long periods of time, are relatively rare. In contrast, societies where trust does not extend beyond the family, or clan, level are very common in history.

The spread of trust is a characteristic of expansionary times, along with increasing inclusion, and a weakening of the ‘Us vs Them’ divide. Essentially, the trust horizon expands, both within and between societies. […] Within societies this leads to relatively stable and (at least temporarily) effective institutions, and bolsters the development of the rule of law. The rule of law means that law constrains the powerful (more than usual), and there is a reasonable degree of legal transparency and predictability, so that people are prepared to trust in the fairness and accessibility of justice. […] Within societies, trust also confers political legitimacy (ie a widespread buy-in as to the right of rulers to rule). Where there is legitimacy, there is relatively little need for surveillance and coercion.A high level of trust (all the way up to the level of national institutions) is thus a prerequisite for an open society. […] Between societies, an expansion of the trust horizon tends to lead to political accretion. Larger and more disparate groups feel comfortable with closer ties and greater inter-dependence, and are prepared to leave past conflicts behind. The European Union, where 25 countries with a very long history of conflicts have come together, is a prime example.

However, all expansions have a limited lifespan, as do the benefits they confer. They sow the seeds of their own destruction, especially when they morph into a final manic phase and begin to hollow out the substance of social structures. Institutions, whether public or private, retain the same outward form, but cease to operate as they once did. For a while it is possible to maintain the illusion of business as usual (or effectiveness and accountability as usual), but not indefinitely. Everything is subject to receding horizons eventually, and trust is no exception. […] Trust in existing organizational structures does not disappear overnight, but ebbs away as institutions decay or the extent of their corruption is revealed. The loss of trust from higher levels of organization undermines the fabric of a society now operating beyond the trust horizon. When trust contracts, socioeconomic contraction is just around the corner. […] Societies in this position lose a critical pillar of support – the collective acceptance of their people. Governing institutions lose legitimacy, at which point the cost of governance increases significantly, because where there is no trust, resource-intensive surveillance and coercion develop instead (Guido comments: note here the cost of the last G20/G8 meeting in Canada came to US$1Billion… Billion with a “B”… that’s twelve zeros of which, other than to feed lobster and caviar to our politicians, the largest chunk was devoted to security). […] On the way down, as on the way up, there are effects both within and between societies, as the ‘Us vs Them’ dynamic sharpens once again. ‘Us’ becomes ever more tightly defined, and ‘Them’ becomes an ever more pejorative term. The result is division between disparate groups of people within a society, for instance the unionized and non-unionized, the haves and the have-nots, or different religious or ethnic groups. When there is a paucity of trust, and not enough resources to go meet highly inflated expectations, the risk of conflict is very high. Previously formed political accretions are at a high risk of coming unglued as they will no be longer supported by trust. […] Between societies, where the existing range of divisive parameters is likely to be much larger, and where there may be a past history of conflict, the risk of conflict flaring up again rises significantly. This is especially likely if societies attempt to deflect blame for the situation they find themselves in towards other nationalities.”

There is much more in the post that is well worth a read.

What remains for me to add is this. Organized society cannot but make use of a monetary system. Adopting a unit of measure and exchange is the one and first condition for the development of a society. Choices of systems are few and very well defined so that, at least in advanced open societies, debate of the choice should be a matter for civic institutions if not the public at large.

Yet, although the monetary system was hotly debated throughout the 1800s, today few understand the logic and ramifications of the choice of one system over another and this is true for professionals in the economic and finance industry too. In our life time, most “experts” and pundits of the dismal science evolve in intellectual environments that have been inculcated into their heads by an academic system that is evidently and deliberately geared to divide along dogmatic ideological lines rather than relying on the empirical scientific method that has demonstrably served us well during the past four hundred years.

So it is that after a century during which some of the great figures of our modern history like Andrew Jackson and Abraham Lincoln fought a pitched war on behalf of the free world, the awesome power of the financial elite, despite having lost several major battles, eventually prevailed on 23 December 1913 and debt based money once again become the monetary system of what was then the nascent global hegemon; the USA.

The rest is history.

“The few who understand the system will either be so interested in its profits or so dependent upon its favors that there will be no opposition from that class while, on the other hand, the great body of people, mentally incapable of comprehending…. will bear its burdens without complaint.” – (Private communication from a Rothschild investment house in London to an associate banking firm in New York dated June 25, 1863 – E. Brown Web of Debt page 91)